Q2 momentum is missing 

 

 

If one were to quickly summarize the performance of the top 500 companies in India, the momentum and the hopes built up in the Sep-20 quarter appears to be missing. Sep-20 quarter came after the devastation of June and hence it was a combination of factories getting back to work and pent up demand back at pre-COVID levels. That story appears to have substantially played out in the Sep-20 quarter and that momentum has clearly not carried into the Dec quarter. v

Interest costs played a role

Lower interest costs have played a key role in profits in the Dec-20 quarter. The last one year has seen rates falling and yields also falling in tandem. With good liquidity in the system, the transmission of rate cuts to the end borrower has also been quite smooth. That has cut the cost of debt to Indian companies. In addition, many of the profitable Indian companies have consciously cut down on their debt to reduce the solvency risk in uncertain times. That also contributed to bringing down the interest costs and improving the coverage ratios. 

Cost tweaks played a role

Most of the manufacturing and services companies engaged in aggressive cost cutting during the pandemic. This could range from renegotiating rental deals to seeking moratorium on payments to a sharp cut in employee costs as well as a clear reduction in the miscellaneous cost component in the income statement. All these boosted profits in a big way but there has been another very critical trend. Most Indian companies have reduced their debtor days and also their inventory to near-JIT levels. As a result, a lot of the funds that were trapped in inefficient working capital cycles have been released. That was instrumental in  thus sharply cutting down on costs. 

Top line still remains the worry

One big challenge at the fag-end of the third quarter results is the drab outlook on the top–line revenues. For example, most banks have seen good traction on treasury but retail lending has been flat and corporate lending revenues have fallen. In the case of most industrial companies, the growth has been flat to negative or in low single digits. That is not a very encouraging signal as it hints that the demand recovery which most of the analysts and investors were betting on; is still not visible in the third quarter. The focus shifts to Q4, but clearly if the top-line does not pick up, the bottom line may run out of ideas to grow. The near-term levers are saturated! ©